By: Toby Wu, Senior Analyst at eToro
At first, it may seem odd to look for any similarities between gold – a shiny metal dug out of the ground that has been used as a currency since ancient times – and bitcoin – a digital cryptocurrency that is less than a decade old.
Surprisingly, there are many similarities between the two, at least from an investment standpoint. Both share characteristics crucial for anything to as a store of wealth – durability, portability, divisibility and intrinsic value. Both have a limited supply and can be used as a store of value. And finally, neither is particularly useful as a spending currency – very few places will accept either gold or cryptoassets in return for goods or services.
But which is better as an investment and are there any differences between them as investment products?
Bitcoin – a future store of value?
Bitcoin, and the majority of the rest of its crypto brethren, like bitcoin cash and ether, are one of the hottest current topics in the investment world. Bitcoin is not quite yet a decade old, but only really entered broader public consciousness in early 2017 when it grew rapidly in value. Apart from its worth as a trading asset, especially in situations where you can profit from both going long and short on its value, bitcoin has a number of features that make it well-suited as a long-term investment and store of value.
Bitcoin is incredibly easy to store, requiring no massive vaults or alternatives to Fort Knox. As anyone who holds any significant amounts of gold will know, the slight annual increase in value of gold is more than offset by the storage costs, whether in safes or rented vault space. Cryptoassets require no such extreme measures and can easily be stored on virtual wallets with exchanges, or at the very most the biggest physical space you would need to securely store any cryptoassets would be a dedicated crypto wallet the size of a thumb drive.
Related to storage, cryptos are incredibly easy to transport. You can easily send millions of dollars’ worth of bitcoin across the globe in less than a second. A million dollars of gold is equivalent to around twelve 1kg bars of gold – something that would need extreme security and huge amounts of coordination and planning to transport safely. You can also easily exchange cryptoassets on any one of the hundreds of exchanges worldwide, while exchanging gold in any large amount would again require considerable time and effort.
Gold is not entirely deflationary. It is very slightly inflationary as we continue to mine gold from the earth, whereas bitcoin has a fixed maximum limit – there will only ever be 21 million bitcoins worldwide. True, the total amount of gold on earth is fixed, but what that finite quantity is, no one knows – in fact no one is even certain how much gold has currently been mined from the earth, with estimates ranging from 175,000 tonnes to 2.5 million tonnes. The world’s oceans alone have around 20 million tonnes of gold dissolved in them, although there is currently no way to extract or collect it.
Gold – an unbeatable heritage?
Gold’s unique characteristics have led to its association with wealth for millennia. Since the beginning of human written history it has been used as a store of wealth and hundreds of billions of dollars’ worth of transactions dealing with gold are carried out every day. Its status as a safe-haven asset has led to its being used to hedge riskier investments, and it is present in the portfolio of most savvy investors. While it has had a relatively stable value for the last eight years or so, it has had moments of strong price increases, especially in times where economic uncertainty or inflation was high.
Readily recognised globally, there are few assets worldwide as accepted as gold. In fact, it was only in the last fifty years that the world’s most used currency, the Dollar, led the charge in untethering its currency from gold, and the last country to join the movement in removing the gold-backing from its currency was Switzerland in 1999. In contrast, very few governments worldwide accept Bitcoin as a valid form of currency, although the trend is moving towards treating it as an investment product.
The price of stocks, currencies, indices, and almost every single product you can think of fluctuates. Bitcoin has built a reputation around its extreme volatility. Gold, with a few exceptions in the 1970s and 2000s, is remarkable stable. The percentage difference between its highest and lowest prices over the last 5 years is only 40%. Bitcoin has had equivalent price movements over a matter of days. As an asset that is meant to preserve its value and keep wealth safe, the benefits of being price-stable are undeniable.
Gold is heavy, it cannot be easily dissolved and it is almost impossible to completely destroy. All of this means that gold is one of the safest, most secure stores of value available, lasting for years and being passed down through families for generations. Cryptocurrencies such as Bitcoin, while easy to transport and store, are also extremely vulnerable to criminal acts. They are also fairly regularly subjected to forks and divisions, leading to new currencies such as Bitcoin Gold which dilute the value of the initial cryptocurrency.
Which asset should I trade?
Ultimately, the decision on which asset to invest in is something that can only be determined by individual investors. Take advantage of volatility as bitcoin continues to bear its growing pains and as the world becomes more digitized, could it turn into a default store of value?
Or play it safe and believe that the world will always need and rely on gold as the underlying store of value?